The Traditional View
Identifying and managing conflicts of interest is one of the most crucial actions a compliance officer can undertake. Conflicts of interest, generally defined as situations in which an individual or organization has an opportunity to exploit their professional position for personal gain, can metastasize into corruption if undetected or ignored. Michael Volkov, compliance attorney and CEO of the Volkov Law Group, notes that several times in his consulting experience “what started as a conflict of interest investigation mushroomed into a fraud investigation where several actors, often relatives, were stealing from the company.” He advises making a strong COI policy “a centerpiece of a company’s corporate governance framework.”
Developing such procedures, however, can be complex. Traditionally, companies have adopted “zero-tolerance” COI policies based on legislative acts which themselves resulted from high-profile wrongdoing. The self-dealing and uncontrolled conflicts of interest that contributed to the Great Depression resulted in the Pecora Commission, the 1933 Securities Act and the 1934 Securities Exchange Act. The Sarbanes-Oxley Act of 2002 was a product of the fall of Enron. More recently, the Great Recession of 2008 spawned the Financial Crisis Inquiry Commission and the 2010 Dodd-Frank Act.
The cycle of scandal, outrage, and reform that spawned these laws is mirrored in many zero-tolerance COI programs today. Sporadic investigative purges are followed by periods of complacency that make crisis management a default state of operating. These programs also often conflate the existence of potential conflicts with actual malfeasance. At a recent Open Compliance & Ethics Group Roundtable, compliance experts bemoaned this practice of “conflict-shaming,” noting, “it’s an important myth to dispel that all conflicts are bad – which isn’t true and shouldn’t be tolerated.”
This approach further encourages firms to treat all COI as uniformly toxic, resulting in policies that disproportionately negatively impact low-level employees. In their article “Shifting Perspectives on COI in the Modern Workforce,” compliance attorneys Jeff Kaplan and Rebecca Walker use the example of a workplace relationship to illustrate this issue. A romance between junior employees is unlikely to cause irreparable harm, yet a zero-tolerance policy treats this relationship with the same degree of severity as one between high-ranking executives or a manager and subordinate.
A New Perspective
More recently, a new approach to COI has taken hold. The reasons for this are various. From a legal perspective, the growing adoption of privacy regulation such as the European Union’s General Data Protection Regulation (GDPR) has placed renewed emphasis on privacy rights, including those of employees. Social media has also played a role, enabling movements like #MeToo. Unlike the outcry after the fall of Enron or the 2008 recession, these new media campaigns have an evergreen quality, fueled by the growing number of survivors and their stories. This has helped create what Kaplan and Walker refer to as a state of “hyper-transparency.”
The evolution of the compliance profession has accelerated this change. The number of companies with mature compliance infrastructures has grown significantly over the past decade; according to NAVEX Global’s 2018 Ethics & Compliance Policy & Procedure Management Benchmark Report, more than a third of all businesses surveyed had compliance programs that could be characterized as either advanced or maturing. These programs “are more proactive when it comes to creating and reviewing their policies,” enabling compliance officers to target assessments and design solutions tailored to the companies they serve. Firms with mature compliance programs also focus on creating a “culture of compliance,” harnessing the motivations and preferences of their workforce to increase COI effectiveness.
Technological advancements have likewise played an important role in COI policy innovation. This is especially true with respect to automated disclosure and COI training. Automated policy management solutions allow compliance officers to distribute disclosures to all their employees and enable firms to create easy, unthreatening ways to make disclosures.